An Analysis of Independent Directors Incentive Mechanism Based on the Principal-Agent Theory

Since the principal-agent relationship exists between independent directors (IDs) and shareholders, the incentive compatibility problems which are still unsolved should be given more attention. The traditional fixed-pay system could preserve the independence of IDs, however, lack of incentives; the performance-related incentive mechanisms have great impact on IDs´ independence which is the core of the system. This paper consider the reputation incentive mechanism (RIM) as an effective way to solve this dilemma. Appropriate RIM can maintain IDs´ independence as well as their incentive compatibility.